Turn Accounts Receivable Processes into a Competitive Advantage

90% of Western European businesses are affected by late payments. What’s more:

• Bills more than 90 days overdue can be worth as little as 20% of their original value.
• Despite business generally offering customers 28-day payment terms, the average days sales outstanding (DSO) is around 67 days.

In fact, things might be getting worse. According to McKinsey: “The additional financial stress brought on by COVID-19 has exposed the limitations of traditional approaches to accounts receivable.”

The gulf between companies with strong accounts receivable processes and those without has widened significantly. Companies boasting strong processes use their operational stability to extend a wider variety of terms and options to customers facing cash flow problems, solidifying customer relationships in the process.

Those without strong accounts receivable processes, however, have to choose between perennially late payments or burning existing customer relationships in the hope of being paid quicker through aggressive tactics.

Let’s examine how companies can reinvent their accounts receivable (A/R processes), digging into organisational, operational, and strategic best practices throughout an institution.

1. Share responsibility for accounts receivable

Sales teams have typically been in charge of negotiating initial payment terms before finance then ensures that customers adhere to these terms.

However, according to Deloitte, this leads to a damaging disconnect amongst sales-focused organisations: “Businesses that prioritize sales often fall into the trap of extending credit to customers, offering discounts or ignoring payment terms if it means winning new sales.” In an ideal world, sales and finance must work together to devise payment terms that work for both the customer in question and the organisation that is serving them.

Deloitte suggests that finance departments should: “Solicit input from the sales team when setting policies to ensure market realities are reflected. For instance, you need to understand when to grant credit, circumstances that may merit overriding credit limits and situations that would justify placing accounts on hold. Once those policies are established, however, the finance team must enforce them and sales should not be authorized to issue credit or change terms without pre-approval.”

By collaborating with the sales team, you can begin to devise effective accounts receivable best practices that work for your organisation, such as clear credit approval processes.

2. Devise a clear process for credit approval

Before allowing a customer to purchase a good or service on credit, you have to first analyse their financial health and history to assess the probability of timely repayments.

You need to establish accurate, robust customer-credit rating systems that you consult before allowing consumers to purchase on credit. Advanced analytics tools can play a crucial role in predicting how likely a customer is to pay on time and without intervention from the A/R team.

And even if a customer does fall within the satisfactory rating range, your organisation should still operate within its predefined policies on maximum credit exposure, maximum payment terms, and pricing.

Deloitte lays out four simple steps for devising the ideal credit approval process:

• Set responsibilities, seeking input from the sales team
• Determine when to assess credit limits
• Commit to approving or rejecting credit applications
• Regularly review the credit approval process

Make the credit approval process as easy as possible for your customers. If you make life easy for them, they’ll be more incentivised to make life easy for you too.

3. Incentivise timely payment

People love incentives—so it’s time for A/R teams to use this to their advantage. GoCardless suggests that a mere 5% discount for early payments (or additional fees for late payments) can work wonders for the health of your A/R. But financial incentives aren’t the only strategy you can use.

Consider the impact of customer experience (CX), for example. A good CX increases your customers’ perceptions of your brand. It makes people happy to do business with you and more likely to return to your website or platform again in the future. Bain & Company even suggests that prioritising a good CX can help businesses grow revenues by 4 - 8%. A poor CX, however, can make a consumer feel stressed even at the mere thought of your company.

When it comes to A/R, you need to make the repayment process as swift, smooth, and seamless as possible for your customers. Reduce friction wherever possible—for instance, consider implementing self-service portals.

Most importantly, try to make your customers feel valued at every stage of their customer journey. If you do, they will think more highly of your company and the experience that you provide them as individuals, making them more likely to repay in full.

For examples of how to do this, consider implementing modern debt collection best practices.

4. Implement modern debt collection best practices

Once you’ve covered the internal back-end of A/R—consulting with sales to devise a clear process and implementing solutions to incentivise timely payments—it’s time to take a look at the external front-end. In other words, how you interact with customers to ensure swift payments.

There are 6 key debt collection best practices to follow:

• Testing
• Turning data into assets
• Contact data segmentation
• Content creation and multi-channel strategies
• Digital communication
• An integrated, multi-channel contact strategy

Collections has come a long way in the past few years and it’s time your A/R team takes a leaf out of their collections department’s book. For example, by choosing to focus on effective KPIs.

5. Choose effective KPIs

The right KPIs help you focus on the data that truly matters, shedding light on current performance and highlighting areas for improvement. However, A/R teams have a wealth of data at their disposal—so which KPIs should they concentrate on?

There are 5 must-follow A/R KPIs:

• Average Days Delinquent (ADD): ADD refers to the average time it takes from an invoice being due to it being paid in full. The lower your ADD, the better.
  To calculate ADD, use the following formula:

• Days Sales Outstanding (DSO): DSO is fairly similar to ADD. However, it instead refers to the average time it takes from an invoice being sent out to it being paid. The DSO formula goes as follows:

• Allowance preparation for expected percentage of current bad debt: Here is the formula:

Then, check your allowance for doubtful accounts to see if it matches the expected amount of bad debt you just calculated. If not so, you will need to recalculate and adjust your allowance for doubtful accounts based on the initial formula.

• Collections Effectiveness Index (CEI): Your CEI compares the amount that was received within a specific time period versus the amount of receivables available for collection within this period.

• Operational cost per collection: Operational cost per collections demonstrates how much each successful collection ends up costing your business.

Tighten up your A/R processes and transform your bottom line

Having poor A/R processes can hamper your organisation, leading to needless time spent chasing up customers, bad debts, and a negative impact on your bottom line. By following the 5 key best practices listed above, however, you can transform your A/R—turning it into a genuine competitive advantage for years to come.

For more unmissable banking best practices, download our industry-leading ‘Future of Collections in Banking’ whitepaper.